Our guide to financial words and terms

This is your guide to all the important words, abbreviations and phrases from the world of investing and pensions.

Active investment: A strategy where an investor (often a fund manager) makes active decisions about where, when and how to buy, sell, or hold equities, bonds or other financial instruments. Distinct from passive investment; a strategy where a benchmark, such as the FTSE 100 Index, is duplicated and tracked.

AIM: Formerly the Alternative Investment Market, AIM is part of the London Stock Exchange. Launched in 1995 with just 10 companies, it is a market where smaller fledgling firms can list and enjoy more regulatory flexibility compared to the main market which is home to larger companies, such as those in the FTSE 100. In the UK, some AIM shares are free from inheritance tax if held for more than two years.

Alpha: A measure which indicates how a fund has performed when compared with its benchmark, often an index such as the FTSE 100, when adjusted for the level of risk taken. Alpha is often interpreted as the percentage which a fund has out (or under) performed its benchmark by.

Annuity: Typically sold by life insurers, an annuity is a financial product, which in return for a lump sum provides a guaranteed income every year for the rest of the retiree’s life or a specified period.

Asset class: An asset class is a term used to categorise different types of investment which share similar characteristics. For example stocks, bonds, and property are three different types of asset class.

Bear market: The opposite to a bull market, where an index has endured a prolonged fall. Pessimism and negative sentiment tend to be characteristics of such a market. If a market falls 20%, it is technically considered to be a bear market.

Benchmark: The yardstick by which investment funds measure their performance. Fund managers typically try to outperform a certain benchmark. For example, a UK fund manager may benchmark their investment performance against the FTSE All Share index.

Blue chip: A phrase used to denote the biggest stocks listed on an exchange. The term derives from poker, where blue betting chips are traditionally of higher value than their white or red counterparts.

Book value: Also known as Net Asset Value (NAV), this is the value of a company, or an asset, according to its balance sheet. This term can be compared to market value to determine whether a company is under- or over-priced.

Bonds: Bonds are IOUs, or debt, issued by governments and corporations looking to raise cash. When you buy a bond, you are essentially lending out your money. They usually pay interest, and have a set duration period, or “maturity”. The loan must be repaid in full when the bond reaches maturity. Sometimes referred to as fixed interest securities.

Government bonds: IOUs, or debt, issued by governments looking to raise cash. They pay interest, usually fixed, and have a set maturity. UK government bonds are known as Gilts while US government bonds are called Treasuries.

Corporate bonds: IOUs, or debt, issued by businesses looking to raise cash. Corporate bonds, like government bonds, pay interest, usually fixed, and have a set maturity period. Generally companies pay interest in two instalments a year, but this can vary.

Junk bonds: A slang term for high-yield or non-investment grade corporate bonds. They are viewed as far higher risk than many bond investments, such as UK government bonds, and investment grade, as their issuer carries a greater chance of default. Rating’s agency Standard & Poor’s classifies junk bonds as those rated ‘BB’ and below, while Moody’s classifies them as ‘Ba’ and lower.

Investment grade bonds: Corporate bonds that are issued by large financially stable businesses, where the likelihood of default on the loan is deemed to be the lowest of all corporate bonds. Rating agency Standard & Poor’s classifies Investment grade bonds as those rated BBB and above, while Moody’s classifies them as Baa or higher.

Bid/Offer spread:Dual prices funds have an offer (or buying) price and a bid (or selling) price and the difference between these is known as the bid-offer spread.

Bottom-up: Refers to an investment approach used by fund managers. A style that selects stocks by analysing companies based solely on their investment quality and potential, regardless of their wider industry and the macro-economic backdrop.

BRICs: Acronym for emerging market giants: Brazil, Russia, India and China. The term BRIC was coined by former Goldman Sachs director Jim O’Neill in 2001 after he forecast the four countries would surpass the likes of the US and Japan in the economic stakes by 2050.

Broker: Such as a stockbroker or insurance broker – a person or firm, which executes buy and sell orders on behalf of investors. Brokers make their money via commissions from their trades.

Bull market: A ‘bull market’ is City slang for a rising market for securities such as shares and / or bonds. It is characterised by optimism and investor confidence. Technically, a sustained 20% market rise would be considered to be a bull market.

CEO: Chief executive officer – the boss or highest-ranking employee at a firm. A CEO’s prime responsibility is management of the business.

CGT: In the UK, Capital Gains Tax is the levy you pay on any profits made when selling something which has gone up in value. It is important to remember that it is the gain which is taxed – not the full sale price. For example, in an investment bought for £100 and sold later for £150, £50 would be subject to CGT. The annual tax-free allowance, which is known as the Annual Exempt Amount, allows you to make a certain amount of gain each year before you have to pay tax.

Commodities: Commodities are natural resources and raw materials, ranging from oil to gold. Includes ‘hard’ commodities such as industrial and precious metals, as well as ‘soft’ commodities such as agricultural produce including coffee and wheat.

Coupon: A coupon is the term used for the interest paid periodically on a bond, expressed as a percentage of the bond’s par value (the value at which it was bought). Because the bond’s price will differ from its par value, the running yield (coupon/price) or yield-to-redemption (the expected yield if the bond is held to maturity) usually gives a better measure of the investment return from owning a bond.

Deflation: Deflation is the opposite of inflation, i.e. when the price of goods and services declines. A country is in deflation if its inflation level drops below 0%. Prolonged bouts of deflation can be dangerous for an economy as consumers stop spending in the hope of buying something cheaper at a later date.

Derivatives: A derivative is a complex financial instrument but is essentially a contract between two or more investors, whose value is determined by fluctuating underlying assets. Typically these assets are stocks and bonds, but they can be linked to currencies, commodities and interest rates too.

Distributions: A payment of interest or dividend to the investor made by the issuer (for example, a fund manager).

Dividends: Payouts made to shareholders of a corporation which shares its profits with its investors. Usually dividends are paid either quarterly, twice a year or annually.

Drawdown: The difference between the highest price and lowest price during a specific period, usually quoted as a percentage. Not to be confused with pension drawdown.

Duration: Relates to bonds and is a measure of the interest rate risk of a bond, or the sensitivity of the bond to changes in interest rates. The figure is expressed as a number of years.

Enterprise Investment Schemes (EIS): Enterprise Investment Schemes (EIS) were launched to help smaller companies to raise cash by offering a range of tax reliefs to investors who invest in such companies. In the UK, with an EIS you can get income tax relief of 30 per cent and investors pay no capital gains tax on profits once the investment has been held for three years.

Equities (Shares/Stocks): Equities refer to shares or stocks issued by firms, which usually trade on a stock exchange. Supply and demand dictates performance, whereby if a stock is in demand, its price will rise and vice versa.

Exchange traded fund (ETF): An ETF is a security, or share, that replicates or tracks a particular index or market such as the FTSE 100. Unlike a tracker fund, they are traded on a stock exchange and can be bought and sold while the market is open.

Exchange Traded Products (ETPs): Like exchange traded funds, exchange traded products track the performance of a market or index however they tend to be derivative based – whereby rather than investing in the components of an index, they instead use derivatives to ‘synthetically’ track the index. Often they are linked to commodities such as oil, where owning the physical commodity is difficult.

Finance Director (FD): The person responsible for the financial health of a company. Duties will include managing financial statements and results and ensuring financial, fiscal and tax related obligations are met.

Financial Conduct Authority: The City regulator formerly known as the Financial Services Authority. The FCA oversees and checks financial firms providing services and products to UK consumers
Financial Services Compensation Scheme (FSCS): The FSCS is a free service and the UK’s compensation scheme of last resort for customers dealing with authorised financial services firms. The organisation only pays customers compensation if a company is unable to, usually as a result of going bust.

Fixed income: Another term for bond related investments. Fixed income assets are IOUs issued by governments and companies. They pay a fixed rate of return, and have a set duration period.

FTSE 100: The FTSE 100 is an index comprised of the 100 largest listed UK firms, often dubbed ‘blue-chips’, listed on the London Stock Exchange (LSE).

Fund: A pooled investment. Typically run by a fund manager who uses investors’ money to invest in a wide range of assets, such as stocks or bonds with the aim of delivering capital growth and/or income.

Fund share classes: Fund managers often provide different versions of fund units – or shares – for investors to buy. These can include an income unit (usually abbreviated to “inc”) or an accumulation unit (usually abbreviated to “acc”). These different versions of units or shares are known as share classes.

Fund supermarket: An online platform where investors can buy, sell and hold investment funds. Buying an investment via a fund supermarket tends to be cheaper than buying directly from the provider. Many of these platforms also allow customers to trade other instruments, such as shares, ETFs, or currencies.

Fund-of-funds: Like a fund, a fund of funds, sometimes known as a multi-manager fund, is an investment portfolio which invests in a range of other funds, as opposed to individual stocks or securities.

Futures: Futures are a type of derivative. Commonly used in oil trading, a future contract refers to an asset that is purchased at a set price but will not be delivered until sometime later.

Gearing: Gearing describes the ratio of a corporation’s debt to the value of its ordinary shares. Investment trusts often borrow – using gearing – to amplify investor returns.

Income and accumulation: Income and accumulation refer to the different types of share classes (defined in 'Fund share classes' above) which investors can access. An income share class will pay out the fund’s net income to the investor in cash. An accumulation share class reinvests your net income back into the fund, with no charge to reinvest.

Income drawdown: A pension feature which allows savers to remain invested during retirement while drawing an income from their pot. It is a riskier strategy than buying an annuity but it allows retirees to potentially enjoy the benefit of further growth in the value of their investments.

Index: An equity index follows the performance of a particular group of shares on a stock markets, often the largest - such as the UK FTSE 100 index or the US S&P 500 index. An index tracker fund will mirror the performance of a particular index.

Inflation: Inflation represents an increase in the cost of everyday living as it devalues spending power. The higher it rises, the less money is worth and people have to spend more to buy the same items. Measured in the UK by the Consumer Price Index (CPI).

Initial Public Offering (IPO): An IPO, sometimes referred to as floatation, marks a company’s stock market debut. It is the very first time it sells shares on a stock exchange, when it goes public.

Investment Trust Discount: Usually refers to an investment trust trading at a price which is less than its net asset value. As investment trusts are traded as shares on the stock exchange, their share prices can fluctuate, based on demand. If a trust is in great demand, its shares can trade at a premium i.e. at a greater value than their actual net worth.

Investment trust: An investment trust operates like an investment fund but it is a structured as a limited company, and its primary business is to invest its shareholders money. They are closed-ended, trading with a set amount of money, and are bought and sold on an exchange, such as the London Stock Exchange.

ISA: Individual Savings Account. A tax-efficient savings tax wrapper for UK savers, where the gains and returns are tax-free.
Junior ISAs (JISAs): Like an ISA, a JISA is a tax efficient savings account, except they are designed to help families save or invest for their children. The money is not available to the child until they reach 18 years.

Leveraging: The borrowing of money or capital with the aim of increasing the potential returns on an investment. Leverage can amplify losses as well as gains.

LIBOR: London Interbank Offered Rate (LIBOR) is the global benchmark interest rate at which banks lend money to each other for short-term loans. LIBOR is widely viewed as a barometer of how confident banks are in each other’s financial strength.

Liquidity: Liquidity refers to how easily an asset can be converted into cash. Shares which can be bought or sold rapidly on the stock market are considered a liquid asset whereas a commercial property would be considered more illiquid as it is can take a lot longer to sell.

M&A: A common phrase used to describe Merger & Acquisition activity – company consolidation trends. A merger is when two firms join forces to create a new corporation. An acquisition is the purchase of another company, which is absorbed into the buying firm.

Market capitalisation: Calculated by multiplying the share price by the number of shares in issue, market capitalisation represents the total value of a company’s shares. When combined with the total value of a company’s debt (and other small adjustments), this gives the ‘Enterprise Value’, or total value, of a company.

Multi-Asset: A fund that generally invests across a very wide spread of asset classes in order to diversify risk. As well as other funds, multi-asset portfolios can invest in individual shares, bonds and commodities such as gold.

OEIC: OEIC or Open Ended Investment Company is legal speak for a fund which, unlike a unit trust, is structured as a company. An OEIC manager creates and redeems shares when investments and redemptions are made.

Ongoing Charges Figures (OCF): The OCF covers all aspects of operating a fund during the course of its financial year. These include the annual charge for managing the fund, administration and independent oversight functions, such as trustee, depository, custody, legal and audit fees. The OCF excludes portfolio transaction costs except for an entry/exit charge paid by the fund when buying or selling units in another fund. This will have an impact on the realisable value of the investment, particularly in the short term.

Passive investment: A strategy where a benchmark, such as the FTSE 100 Index, is duplicated and tracked. Funds using this strategy, sometimes known as tracker funds or index trackers, are often run by robots (or algorithms) rather than fund managers making active investment decisions.

PE Ratio: The Price to Earnings Ratio is one common method of valuing a company. It is calculated by dividing a company’s share price by its earnings per share.

Premium: A difference between an asset’s net asset value and the price being paid. For example an investment trust’s shares can trade at a premium to the portfolio’s actual net worth, if it is in high demand.

Profit warning: An announcement from a company to the stock market that its profits are likely to be less than anticipated. Typically a profit warning is flagged up a few weeks before a firm publishes it latest results in a bid to manage shareholder expectations.
Quantitative Easing (QE): Quantitative Easing is a tactic used by central banks to encourage lending and spending whereby they electronically print money in a bid to prop up the economy and stave off a period of deflation. Essentially QE typically involves a central bank purchasing government bonds.

Redemptions: The process by which an investment can be converted back to cash. The ease with which this can be done is often dictated by the liquidity – i.e the number of potential buyers and sellers in the market for a specific asset – of the underlying investments.

Rights issue: A rights issue occurs when a publicly listed firm issues new shares to existing shareholders in a bid to raise money. Existing shareholders have pre-emption rights to buy the shares before anyone else. A company might do this if it is in financial difficulty and needs more cash or if it wants to raise money for expansion. It will dilute the value of the shares already in issue.

S&P 500: The US’s main stock index – the Standard & Poor’s 500, is an equity index based on the market capitalisation of the 500 largest companies listed on the New York Stock Exchange or NASDAQ.

Securitisation: Securitisation refers to the process of creating a new investment which is secured against an underlying asset. For example debt from mortgages could be packaged together and then be sold off.

Share buyback: A process in which companies either buy shares back from investors on the open market, or present shareholders with a tender offer in which the investor can redeem an allocation of their shares at a premium to the current market value. In cutting the number of shares in issue, businesses aim to increase the value of shares still available.

Share class: Companies and funds typically issue more than one class, whether it be shares or units. Different stock or share classes from the same company will have different obligations to their investors.

Shares in issue: The total number of shares currently attributable to a company, whether owned by the general public, large institutional investors, or employees of the company as part of their remuneration.

Shorting: A strategy used by professional investors where they bet on the value of an asset, such as shares, losing value. It involves borrowing an asset and selling it on in order to buy it back at a later date, at a lower price where it is then returned it to its original owner.

SIPP: A Self Invested Personal Pension or SIPP is a pension wrapper, which allows savers to buy and sell investments such as funds and shares, to match your needs and risk appetite. Some bespoke SIPP offerings even allow investors to hold physical commercial property.

Swap: A derivative contract in which two parties agree to swap the investment returns from two instruments. Common swaps include currency and interest rate swaps.

Top down: A term used by professional investors. Top down investors select industries and stocks to invest in based on the wider macro-economic and industry backdrop rather than the fundamentals of individual shares. Most investors will combine top-down and bottom-up strategies (looking at an individual share’s characteristics) when they make investment decisions.

Tracker fund: A tracker fund, sometimes known as an index tracker, is essentially a computer run fund which mirrors, or tracks, the trajectory of a particular market or index, such as the FTSE 100.

Trustee: A trustee safeguards assets for investors.

Unit trust: Legal term for a type of open-ended pooled investment or mutual fund, in which investors can buy units. The manager creates units for new investors and cancels them when they are redeemed.

Valuation point: The time of day at which the price of a fund is calculated.

VCT: Venture Capital Trusts (VCTs) are listed funds, run by a fund manager, who invest primarily in fledgling businesses, which are not publicly listed on a stock exchange. There are strict rules governing what types of companies VCTs can invest in. VCTs are typically viewed as higher risk investments than large listed companies but if you hold your shares in a VCT for at least five years you get income tax relief in the UK. There is no Capital Gains Tax on profits from selling your shares.

Wrapper: Wrapper refers to a tax-efficient structure in which you can save, such as a pension, SIPP or ISA where gains and interest earned are sheltered from the taxman to some extent.

Yield curve: A line on a graph, which plots the interest rates of similar bonds with different lengths of time to maturity, such as three-month, two-year, five-year and 30-year government bonds. The curve is analysed for signals of future changes in interest rates and economic activity.

Yield: Yield is another term for the income received from an investment, such as a fund, bond, or dividend-paying share.